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Congress eventually passes new federal estate tax legislation. But waiting may have consequences. Here’s what you need to know to help you navigate the uncertainties of current and possibly future estate tax rules. Few people ever imagined a time without estate taxes. Since the federal estate tax is repealed for this year, it may seem like that time is now. But the reality of the current law is not so clearcut. Congress‟ failure to pass legislation before the tax expired this year, and the possibility that an estate tax will be retroactively reinstated, is certainly a cause of confusion and anxiety for anyone dealing with the death of a family member. Even if you are relatively young and healthy, you may be wondering what effect current or future rules may have on your estate. No one can predict when Congress will act or what rules will apply. “Most people believe there will be some form of estate tax going forward,” says Dan Prebish, attorney in the Key Clients Solutions Group. “The consensus is that the federal exemption, the value an estate must exceed before it‟s subject to estate taxes, will probably be within the $2 million to $5 million range. But it just as easily could go back to $1 million.” To help you navigate this uncertain time, here‟s what you need to know now about current estate tax rules and how to plan for possible reinstatement of the tax: Consider your goals. If you already have an estate plan and no significant health risks, now may be a good time to clarify your goals and consider how you want your financial success to affect your heirs. Think about: What is your ideal plan with and without an estate tax? Would you rather your heirs receive a lump-sum inheritance or would they be better off with a lifetime of secure income? Do you want to maximize the amount transferred to your family members or do you what to give them only what is left after you‟ve taken care of your financial needs? Or is your goal somewhere in between?
People at a significant risk of death due to advanced age or fragile health should consult with their attorneys. “Those wills and trusts probably were not written to account for estate tax repeal, retroactive reinstatement or modified carryover instead of „step-up‟ basis,” Prebish says. “Step-up” basis refers to the new cost basis assigned to assets equal to their fair-market value at death. It has been replaced with modified carryover basis for 2010 only. Under this rule, an estate‟s executor can exclude unrealized gain of up to $1.3 million (or $4.3 million for assets passing to a surviving spouse). Only a small fraction of estates will exceed this exemption, which will probably change again when an estate tax is reinstated. Keeping good records is key. Enlist your financial advisor‟s help to track of the value of your assets, especially those bought or inherited some time ago.
Build a net worth statement. Work with your financial advisor on a summary of your new worth and review your life insurance so you are prepared to evaluate your situation as soon as Congress resolves the tax issue. “Some people who have life insurance in an irrevocable trust,
which is not included in their taxable estate, might want to reevaluate that policy if they end up not having an estate tax liability,” Prebish says. Maximize exemptions. For married couples, credit shelter planning may be more important than ever. “Surviving spouses can inherit their deceased spouse‟s assets without incurring an estate tax liability, but they don‟t inherit their spouse‟s exemption to pass on to their heirs,” Prebish says. With a credit shelter trust, you can set aside an amount equal to the maximum federal exemption at time of death, to help reduce your family‟s potential tax liability. Consult with your attorney to explore your options, especially if you live in a state other than one of the nine with community property laws. Also keep in mind that nearly half of all U.S. states impose an estate tax in addition to, and sometimes at a different level than, the federal tax, which requires special planning. Think about skipping a generation. Many people think generation-skipping means skipping over your children. “In fact, generation-skipping is about avoiding estate taxes,” Prebish says. For example, you can create a trust for up to the maximum amount of the federal exemption (up to twice that amount for a married couple) from which your children can receive income and have access to principle, depending on how restrictive you want to be. Whatever remains in the trust when the second generation dies, is exempt from future estate taxes. Together, we can discuss:
Estate planning options Net worth, life insurance and irrevocable trusts Credit shelter planning and generation skipping